Buy or Lease a Car. published by AAA Fair Credit Foundation

Transcription

1 Buy or Lease a Car published by AAA Fair Credit Foundation

2 Buy or Lease a Car 1. What is Leasing? The Pros and Cons of Leasing and Buying Which Is Right For Me? Things to Know Before Leasing or Buying Understanding Certified Pre-owned Vehicles Frequently Asked Questions

3 What is Leasing? 1 In recent years the popularity of leasing has skyrocketed. This is not surprising when you see commercials for the car you want to buy and the monthly lease payment is almost half the monthly purchase payment. Don t let the lower payments lure you into thinking that s all there is. Leasing is not terribly complicated, yet many do not understand it. In short, a lease is like renting a car for a period of time with the added option to buy at the end of the lease. The reason that payments are so much less is that leasing is an option where you are basically paying for the amount the vehicle depreciates in value during the time you use it. For example, you are looking at a car that you could buy for $22,000. If instead you leased that car for 3 years, the dealer estimates how much the car will be worth at the end of those three years, say $11,000. From this the dealer figures the difference between the original cost, $22,000, and the residual value, $11,000, plus finance charges to determine your monthly lease payment. ($22,000-$11,000 = $11,000). So, in this case your monthly lease payment is based on an $11,000 principal loan amount plus finance charges. The monthly payments for a loan to purchase the vehicle are higher because you take on the entire cost of the car, $22,000. More detailed information about how leasing works may be found at You can also test your leasing knowledge and skills with the leasing quiz located on Some of the biggest reasons to consider leasing over buying are: Lower Monthly Payments - Because you are not purchasing the vehicle, only paying for the time that you use it, monthly payments can be 30-60% lower than if you bought. W H AT I S L E A S I N G? 02

4 More Car for Your Money - On the same principal as before, you are only paying for the time that you use the car. This means it may be possible to borrow a car that you normally could not afford to purchase. New Cars More Often - Lease terms generally run between two and four years. At the end of the lease you can either purchase that vehicle or look at leasing or purchasing a completely different vehicle. Remember, just because there are good reasons to consider leasing, doesn t mean you should immediately run out and lease your next car. Leasing is not right for everyone, and depending on your individual financial situation and driving habits, it may be more advantageous for you to buy. The rest of this brochure addresses the ups and downs of both leasing and buying as well as how to determine which option is best for you. Lower Tax Responsibility - In most states and Canada, you are only taxed on the portion of the vehicle that you are borrowing. Also, the tax is wrapped into your monthly payments so you are not hit all at once. Fewer Maintenance Hassles - If you get a lease that covers the same time as the manufacturer s warranty, most, if not all, repairs will be covered which means less of a hassle for you. W H AT I S L E A S I N G? 03

5 The Pros and Cons of Leasing and Buying 2 LEASING ADVANTAGES Lower Monthly Payments shorter Terms - This is great if you like new cars often or you are afraid of the long term commitment of buying. GAP Insurance - Guaranteed Auto Insurance, or GAP, provides protection if your leased vehicle is damaged or stolen during the time of your lease. This is something to consider if you are afraid of something happening to your car soon after leasing it. If you leased the car and something happened, insurance companies base their calculations on the used value of the car even if you just drove it off the lot! Leasing Disadvantages Mileage Restrictions - usually leases come with mileage limits around 12,000 per year. If you go over these limits, the price is high around $0.15 per mile. you Don t Own Anything - Buying a car costs more, but it also builds equity. Good Credit Requirement Harder to End - Leases are harder to terminate if you need to get out of the agreement. upkeep - You have to keep the car well maintained or you could get charged at the end of a lease. Lower Sales Tax - You can pay the sales tax of the car over a period of time. T h e P r o s a n d C o n s o f L e a s i n g a n d B u y i n g Tax Write-Off - If used for business, leases are typically a tax write-off. Investment Potential - You can invest the money you are saving. 04

6 Buying Advantages Mileage - No mileage restrictions. Ownership - You own the car. Fewer Credit Restrictions - Your credit is not as big of an issue. Upkeep - You can maintain the car to your standards. Customization - You can customize the car any way you want. Buying Disadvantages Monthly Payments - Buying usually results in higher monthly payments, but not always. Repairs - You are responsible for repairs after the warranty ends. Loan Terms - Term for repayment may be longer. Sales Tax - You have to pay sales tax at the time of purchase. Flexible Loan Termination - You can sell the car yourself anytime. T h e P r o s a n d C o n s o f L e a s i n g a n d B u y i n g 05

7 Which is Right for Me? 3 Lease If: You like having a new car every two to four years. You can t be bothered with repair bills, whether they are covered by the manufacturer s warranty or not. You know you ll keep the car for the full term. You re gentle on cars and unlikely to incur damage beyond normal wear and tear. You are self-employed (or an employer) and know you can write off some of the expense in taxes. You want to drive a nicer car than you could afford to buy, or simply acquire a car now that you may be able to afford in the future. You don t have the money for a large down payment. You have good credit. For a lease company to sign a contract with you, and for the terms of that contract to be favorable, you must have a good credit history. W H I C H I S R I G H T F O R M E? 06

8 Finance/Buy If: You don t mind driving the same car for many years. You don t mind paying repair bills for part of the car s life if it means having no further monthly payments. You think you might have to give up the car unexpectedly. You re rough on cars and don t want to risk paying a penalty. You re buying a car for personal use. Prestige is not an issue. And, if you are still just concerned with money... The short-term monthly cost of leasing is always significantly less than the cost of buying. The medium-term cost of leasing is about the same as buying, assuming you sell the vehicle at the end of the lease agreement. The long-term cost of leasing is always more than the cost of buying, assuming you purchase the car at the end of the lease agreement. You d rather pull together more money for a down payment and know that you re building equity in the vehicle. Your credit record is poor. Bad credit is a hurdle no matter which avenue you choose, but it s most likely to either disqualify you from leasing or make leasing terms very unattractive. W H I C H I S R I G H T F O R M E? 07

9 Before You Lease or Buy 4 1. Short-term costs of leasing are always lower than short-term costs of buying. The long-term costs of leasing are always higher than the long-term costs of buying; assuming you keep the car you purchase outright for a number of years after your loan is paid off. 2. If you lease for the length of the manufacturer s warranty, you ll never have to pay for major repairs. 3. You can lease without a down payment, although making one will lower your payments. 4. Terminating a lease before it s up can be extremely costly. 5. Since you don t own a leased car, you can t change it, paint it, or add equipment to it. 6. Sign only closed-end leases, which means that if at the end of the lease, the car is worth less than the leasing company estimated when you signed your lease, they, not you, absorb this cost. Read the fine print of the proposed lease and make sure you understand all the terms. 7. Putting more miles on the car than the lease allows can cost you big money since you ll pay a designated amount per mile for every mile driven over the allowance. 8. Negotiate the lowest capitalized cost or lease price of the vehicle you ll be leasing because your payments are based on this cost. A good lease will offer you a price below the Manufacturer s Suggested Retail Price, often referred to as the MSRP. 9. The best cars to lease are those with the best book value after the term of the lease. Since they depreciate less, you pay less. You can look up lease ratings to see which cars retain their value better and will therefore give you the best lease deal. Stay away from cars which depreciate quickly unless you re willing and can afford to pay more. B E F O R E Y O U L E A S E O R B U Y 08

10 Understanding Certified Pre-owned Vehicles 5 Certified pre-owned vehicles are a great option for many people. Instead of dealing with the high rate of depreciation you can get a newer car at a used car price. Not only do you get a used car price, but you also get a car that has been inspected for any problems and a warranty if something goes wrong. And if that s not enough, many dealerships offer incentives to buy certified preowned. So, if you don t want to lease and have reservations about buying new, certified pre-owned vehicles are an effective way of getting almost the best of both worlds. A used car may be re-sold as certified if it meets certain requirements. Certification requirements are set by the car manufacturer, which results in differences between programs. However, you can expect that: All certified pre-owned have undergone a multi-point inspection - usually around 100 points All have met an age and mileage requirement All have an extended warranty Some certified pre-owned programs also offer: Special Financing Options Roadside Assistance Exchange Program A replacement vehicle for use if your vehicle ever needs extended repair work U n d e r s ta n d i n g C e r t i f i e d P r e - o w n e d V e h i c l e s 09

11 Now, before you go running off to buy a certified pre-owned vehicle, consider a few things: Do not assume a certified preowned vehicle is worth what a dealer is asking. Compare the price with that of non-certified cars of the same age and mileage. This will help you determine if the difference in price is worth the extras. warranties are different for each program. The best warranties are comprehensive. While most luxury car manufacturers offer comprehensive warranties, many other manufacturers don t. Make sure you understand the warranty, what it covers and for how long. Dealer certification is not the same as certified pre-owned. Be careful of these because the manufacturer does not back dealer certified vehicles with a warranty. Be aware of the deductible. If there is a charge for service, find out how much it is and when you have to pay it. Generally, you will not want a plan that has a deductible higher than $100 per visit. Know who provides the service. See if the warranty is transferable. Some programs will allow you to transfer the warranty, which may be good if you ever sell the vehicle. U n d e r s ta n d i n g C e r t i f i e d P r e - o w n e d V e h i c l e s 10

12 Frequently Asked Questions 6 Q. What if I change my mind about the car after I buy it? A. Basically, you are out of luck. Once you have signed a contract, the car is yours and the dealer does not have to take it back. There is no cooling off period for car purchases. If a dealership or salesperson tells you otherwise, make sure you get that promise in writing BEFORE you sign any agreements or take the vehicle off the lot. There are a few things you can do to avoid regretting the vehicle you purchase: 1. Do some preliminary research. You probably already have an idea of the cars in which you are interested. Take some time, before you shop, to research the market value, invoice price, and general consumer information for those vehicles. This way you won t have to rely on what the salesperson or dealership tells you you will have your own, unbiased information to use. 2. Do not purchase the first car you drive or from the first dealership you visit. Take time to shop around and compare vehicles and offers. Also, ask about any manufacturer rebates or incentives being offered. 3. Do not buy on impulse. Caving to pressure is a major reason people often regret their purchase later. Once you find a dealer and vehicle you like, take all the agreements and vehicle information home with you where you can double check the agreement and your budget in a neutral environment. No matter how much the salesperson or dealership tries to convince you to buy immediately don t do it. Q. What if I buy a lemon? A. Everyone knows that calling a car a lemon is a nice way of saying it s a piece of junk, but what if you bought one? Fortunately, you are not necessarily stuck with the car. Though lemon laws differ from state to state, every state has one. Lemon laws enable a consumer to return F R E Q U E N T LY A S K E D Q U E S T I O N S 11

13 a defective car if certain criteria are met. Sometimes these are rather stringent requirements because car manufacturers don t like to take back a car. Although, in every state a car: 1. Must be purchased from a dealer. Lemon laws do not apply to privateparty sales. 2. Must be different than what the dealer promised. Lemon laws do not cover defects disclosed in your purchase agreement even if they aren t brought to your attention. Red flags that the car you purchased may be a lemon: 1. The car keeps breaking down within the warranty period. 2. The car is a safety hazard. 3. The dealer is unable to fix the car while it is warranted. Again, each state has its own regulations in regard to what qualifies as a lemon and how to pursue retribution in the unfortunate event that you end up with a defective vehicle. Also, be prepared. Even though these laws are there for your protection, you will most likely have to go to court and prove your case. F R E Q U E N T LY A S K E D Q U E S T I O N S 12